Here is Kaufman Bros' new PSIX BUY/BUY report dated March 26, 1998.
I am a PSIX investor only and not in any way associated with PSIX or Kaufman. - Charlie
PSINET, INC. (PSIX-$10 7/8)*
RATING: BUY/BUY PRICE TARGET: $18
Qwest Communications International Inc. (QWST-$39 1/8) today agreed to purchase EUnet International, an ISP based in Europe, for $154MM in cash/stock. EUnet, based in Amsterdam, has operations in 13 countries, over 400 employees, and 60,000 primarily business customers generating annualized 1Q98 revenues of roughly $64MM. In addition, QWST is funding EUnet's purchase of a 50% interest in X-Link, a German ISP. The news comes on the heels of QWST's $4.4MMM bid for LCI International, Inc. (LCI-$39 «).
We think the news gives significant visibility to the notion that PSIX, a leading facilities-based commercial ISP with 400+ POPs in the United States, Canada, Europe, and Japan, is an attractive takeover candidate at current levels. The QWST maneuver values EUnet at roughly 2.4x annualized 1Q98 revenues and 2.8x trailing 12-month revenues. This valuation is at the low end of recent comparable purchases of ISPs (e.g., UUNet by MFS - 10x sales; Digex by Intermedia [ICIX-$88 _] - 8x; GlobalCenter by Frontier [FRO-$33 7/16] - 8x).
Because of its growing global infrastructure (PSIX will gain access to 40,000 route miles of OC-12 fiber over the next few years through a transaction with IXC Communications [IIXC-$58 3/16]), diversified product offering (we estimate that PSIX will soon move into the IP telephony services space and potentially transform into a next generation IP-based telco), strong customer base (includes 37 of the Fortune 100), and strengthening financial condition (the company is currently conducting a 144A offering to bolster the balance sheet), we think PSIX could command a substantial premium to EUnet's valuation under a takeover scenario.
We think a 5x-6x annualized quarterly revenues valuation would be in-line for an ISP of PSIX's caliber. We estimate that PSIX will report 1Q98 revenues of $40.857MM. 5x-6x annualized estimated 1Q98 revenues of $163.4MM translates into target private market values (PMVs) of roughly $817MM-$981MM. These valuations imply fair takeover values for PSIX of roughly $16-$19 per share.
PSIX's revamped management team intends to build PSIX into a global, independent, commercial ISP through internal growth of roughly 40%-45% and external growth of 40%-45%. The company is currently evaluating numerous M&A candidates as potential complementary additions to its organization. Under this backdrop, we think PSIX is poised to become a significantly larger company over the next few years.
We think the QWST/EUnet transaction will catalyze substantial investor interest in PSINet's story. Given these circumstances, we are reiterating our "Buy/Buy" recommendation on PSIX. Our 12-month price target remains $18. |
